Graham Holdings Looks Abroad for Future Without Buffett

By Oliver Staley -
Feb 14, 2014

For more than a decade, Graham Holdings Co. (GHC), the former Washington Post Co., relied on American students at its Kaplan colleges to fuel growth. With for-profit education under siege in the U.S., the future of the rapidly transforming company may lie abroad.

Graham Holdings sold the Washington Post newspaper to Amazon.com Inc. founder Jeff Bezos in August, and Warren Buffett, Graham’s largest shareholder, said Wednesday he was exploring ways to exit his $1.1 billion stake.

Revenue at Graham Holdings fell 26 percent in the nine months through September from three years earlier, and Kaplan’s total sales slumped 25 percent. In the same period, Kaplan’s international unit climbed 36 percent to $574 million.

Kaplan isn’t the only for-profit school in the U.S. to look beyond the border. Laureate Education Inc. has almost 800,000 students in 30 nations and about $4 billion in annual revenue, while Apollo Education Group Inc. (APOL) boosted foreign sales more than 20-fold in four years. Demand for higher education outstrips the supply in many countries, where for-profits don’t face as much regulation and competition from traditional colleges, said Michael Moe, chief executive officer of GSV Capital Corp., which invests in education companies.

“Outside the U.S., it’s a wide-open area to run in without as much scrutiny,” said Moe, whose company manages about $500 million in investments and is based in Woodside, California. “Around the world, the thirst for quality education is off the charts. If you can provide access to educations programs that have credibility, there’s not a lot of opposition to that.”

‘Aggressive’ Regulation

For-profit higher education is facing challenges on a number of fronts, including the economy and “an aggressive regulatory stance” from the Obama administration, Melissa Mack, a Kaplan spokeswoman, said in an e-mail.

While some regulation is appropriate, other countries that see higher education as a driver of economic growth are more welcoming to companies like Kaplan, Mack said.

“The regulatory environment is one of several factors that impacts the attractiveness of a market,” she said.

Graham Holdings changed its name in November after the $250 million sale of the newspaper to Bezos. Washington-based Graham Holdings reports its first quarterly earnings without the newspaper on Feb. 21. The shares rose 0.5 percent to $658.34 yesterday in New York. They have gained 18 percent since the newspaper sale was announced.

Berkshire Hathaway

In a regulatory filing Wednesday, Buffett’s Berkshire Hathaway Inc. (BRK/A) said it was discussing a possible asset swap. Graham may turn over holdings including a business, and possibly shares it has in Buffett’s company. Omaha, Nebraska-based Berkshire would exchange its Graham stake if a deal is signed.

Buffett’s company may acquire additional shares in Graham Holdings or sell its holdings if an agreement isn’t reached, Berkshire said in the filing. Buffett’s company owns 1.73 million shares of Graham, or about 28 percent of the company.

An exchange might let Buffett pick from among businesses he knows well as a former Washington Post director while avoiding taxes that would be required if he sold the shares in the open market, said Luke Sims, a portfolio manager at the Eagle Capital Growth Fund, which invests in Berkshire. Sims said the Kaplan business or Graham Holding’s television assets could appeal to Berkshire.

Buffett ‘Hallmarks’

“It has the hallmarks of a Buffett deal, very tax efficient,” Sims said in a telephone interview. “Generally what’s left are desirable businesses. It’s the newspaper that was the problem.”

Buffett didn’t respond to a message seeking comment about the proposed transaction.

Kaplan International has operations on six continents and more than 15 countries. Along with colleges such as Dublin Business School in Ireland and four business schools in Australia, Kaplan operates English-language academies, which served 70,000 students in 2013 at more than 45 locations, according to its website.

It also runs programs that recruit students from countries such as Nigeria and Vietnam for schools including Northeastern University in Boston and the University of Liverpool in the U.K. The students take prep courses at Kaplan centers embedded in the campuses of the nonprofit colleges with the possibility of later transferring to those universities.

Underserved Students

Kaplan and other U.S. for-profit colleges are particularly good at catering to adults and other non-traditional students who aren’t well served outside the U.S., said Trace Urdan, an analyst at Wells Fargo Securities in San Francisco.

“Adult education is still pretty nascent outside the U.S.,” Urdan said. “There’s still lots of opportunities to serve that working population that wants to go back to school.”

Kerwin Norley, 27, is finishing his final year of an undergraduate law degree at Kaplan Holborn College in south London. A former British Army trooper who served in Afghanistan, he said he gained admission quickly. Enrollment in college was a requirement for his early release from military service.

“The acceptance process was very efficient,” Norley said. “I went online and within 24 hours I had an application. I sent it in and in 48 hours I was accepted.”

The school, founded in 1969 as Holborn Law Tutors, was acquired by Kaplan in 2005. It provides courses in law, business and accounting, though degrees are awarded by public university partners, according to its website.

Few Amenities

Located on a busy commercial street, the school lacks the amenities of larger universities, said Francis Matangi, 39, a law student originally from Zimbabwe. Matangi began his degree at London South Bank University and transferred because of Kaplan Holborn’s lower tuition.

“What they lack is a social life,” Matangi said. “There’s no facilities, no gym, no place to meet other students. It helps with the learning, doesn’t it?”

To further expand overseas, Kaplan will probably need to acquire colleges with established names and reputations, Urdan said. That could put them in competition with Laureate and Apollo, as well as private equity firms, he said.

“Attractive assets are definitely in an auction situation” Urdan said. “Kaplan is not known for paying aggressively. They have a reputation for being cheap buyers. They may let Apollo and Laureate duke it out and go for less obvious assets.”

International Acquisitions

Kaplan International won’t discuss its acquisition plans, said spokeswoman Mack.

“Kaplan anticipates continued growth internationally, but it will not come at the expense of quality, even if that goal means slower growth in some areas,” Mack said in an e-mail.

For-profit colleges with foreign operations may feel the pinch from increased competition and regulation abroad, said Daniel Levy, an educational policy professor at the University of Albany in New York.

In some countries, traditional universities are lobbying for more oversight of the programs, and the establishment of accreditation agencies, Levy said. In Russia and Georgia, public universities are now competing with for-profits by offering fee-based programs for students who don’t qualify for the elite, free institutions, he said.

“In a lot of countries the era of easy growth is over,” Levy said. “It doesn’t mean for-profits can’t do it, it doesn’t mean international for-profits can’t do it, but a wise investor would want to be aware of these headwinds, these countervailing forces.”

Political Influences

Political changes are also shaping the outlook, Levy said. In Chile, Michelle Bachelet won election as president in December by promising free higher education after students took to the streets in protests. In January, a Laureate-owned school there was stripped of its accreditation after losing an appeal, cutting its access to government loans for new students.

The pursuit for growth abroad comes amid mounting competition in the U.S. from nonprofit universities offering lower-cost online degrees. Southern New Hampshire, Liberty and Arizona State universities are now among the largest online schools, said Robert Lytle, co-head of the education practice at the Parthenon Group LLC, a Boston-based consulting company.

“The sector is under a lot of pressure from more traditional brands,” Lytle said. “They didn’t compete for 15 years and now they do. That creates real pressure. There’s a whole new asset class coming at you.”

More Regulation

In the U.S., for-profit colleges face not only greater competition for students, but also tighter oversight.

The Consumer Financial Protection Bureau, a U.S. agency created in 2011, is examining skyrocketing student debt -- which now totals $1.2 trillion -- and has received thousands of complaints from student borrowers at both for-profit and nonprofit schools.

Average debt for 2012 graduates of such colleges who took out student loans is $39,950, or 36 percent more than the average for graduates from all colleges with loans, according to the Institute for College Access & Success, a nonprofit organization in Oakland, California.

Since Jan. 24, at least four for-profit operators have also received demands for information from a group of state attorneys general. Graham Holdings hasn’t received a request, Mack said.

Increased regulation and industry probes have been bad for business in the U.S., and that hurts poor students, Donald Graham, chairman and chief executive officer, said at an investors conference in New York in December.

Poor Students

“Kaplan has cut way down in the last four years on the number of students we serve, from 119,000 at our peak to about 65,000 today,” Graham said. “Most of the students we were serving are the nation’s poorest and no one is serving them now.”

Kaplan’s test prep unit, its original business founded in 1938, has also experienced a slump. In 2012, it accounted for 7.2 percent of total revenue, half that of a decade earlier. Some of the decline comes from shifting revenue from English instruction to the international unit. A drop in the number of students seeking admission to law school and business school is also to blame, Mack said.

Alvaro Prada, an accounting student at Kaplan Holborn from Madrid, said he wasn’t aware of difficulties facing Kaplan in the U.S. His school is recommended by Britain’s Association of Chartered Certified Accountants, and has a good reputation, he said.

“It doesn’t bother me that they are for-profit,” said Prada, 40. “I think that they are trustworthy.”